Pay no attention to the people behind the curtain

Wednesday, February 10, 2010

Why We Can't Pull out of the Economic Tail Spin

According to Henry Banta of the Nieman Foundation, Republicans are locked in an embrace with the corpse of Reaganomics. Not only will they not let go but the media will not break the grip:

Efficient market theory dominated economic thinking from the days of Ronald Reagan to the collapse of 2008. It was the rationale for deregulation, the cause of a massive transfer of wealth and income from the middle class to a tiny number of the very rich. Now it is dead and gone but Republican politicians won’t let go, and many in the media show no understanding of the issue.

But who bears the brunt of this philosophical justifications for greed?

Despite catastrophic events, it is folly to expect the suffering of millions and an onslaught of inconsistent facts to wipe out an economic theory whose tenets were and still are so convenient for so many powerful economic interests. At present the defenders of the efficient market hypothesis are engaged in trying to pin the cause of the financial crisis on the government. (If the financial crisis was the result of government policies, then one could still plausibly claim the market to be rational, efficient, etc.) Their targets include the mortgage practices of the quasi-government lenders, Fannie Mae and Freddie Mac, the Community Reinvestment Act of 1977, the low interest rates of the Federal Reserve, and a pessimistic speech by President George W. Bush. The problem with this “blame-the-government” approach is the disproportion between these purported causes and economic effects.

It comes down to the notion that a smart nation makes the economy work for its people. Not the other way around.